volcker vs. greenspan
Much like the shifting partisan politics which rules Washington in 2- to 4-year cycles, stewardship of the Federal Reserve has ebbed and flowed between neo-Keynsians and Austrians since the birth of American central banking nearly 90 years ago. Two of the Fed’s greatest leaders and keenest minds have crafted American monetary policy for most of the last three decades, and yet they couldn’t be more different.
This is their story.
How Paul Volcker and Alan Greenspan Reinvented the Fed
Economics has been called the “dismal science” for almost 200 years, remaining on the fringes of modern policymaking until a string of recessions and panics in the late 19th century. These tremors reminded political leaders that a basic understanding of market mechanics can often prevent painful shocks to industrialized economies. It is perhaps no surprise that some of the biggest names in economics have surfaced during periods of great financial and political stress. Adam Smith’s Wealth of Nations was published in the same year as American independence was first declared, while John Stuart Mill’s Principles of Political Economy was published in the “Year of Revolution” (1948) and John Maynard Keynes developed his modern theories of macroeconomics in the wake of the Great Depression.
In each case, the power and influence of these great thinkers came from ideas rather than actions. Theirs was a softer power, more persuasive than coercive, more incremental than overwhelming, more collective than autarkic. It was precisely this world into which Paul Volcker and Alan Greenspan were born, one where politics drove policy and economics was merely taken as auxiliary advice. For most of the 20th century, Keynes was perhaps the only exception to the rule, and it wasn’t until Volcker and Greenspan rose to national prominence in the 1980s and 1990s that a single unelected economist could assume so much power and influence over public policymaking and American prosperity.
During the next quarter century, these two economic heavyweights reinvented the role of the nation’s central banker as their influence spread beyond the Federal Open Market Committee (FOMC) and into the Oval Office, the halls of Congress, and even the homes of the voting public. They developed consensus around their often radical ideas within the democratic FOMC, then communicated these often controversial decisions with the all the skill of a master politician. The role of Chairman, as they came to reinvent it, was part finance, part psychology, part political science, and part public relations, and under their watch it has become one of the most powerful positions in Washington.
As a result of their innate talents, the volatile environments into which their tenures were born, their innovation at the helm, and the legacies they left behind, they are perhaps the most famous Chairmen in the history of the Federal Reserve. That said, in many ways, they couldn’t be less alike. As one journalist remarked: “Volcker is tall; Greenspan isn’t. Volcker is a man of few words; Greenspan won’t shut up. Volcker retired as Fed chair and avoided the limelight; Greenspan is doing everything possible to make sure the light shines on him.”[i] But the truth is far more nuanced, and any objective comparison requires not only a better understanding of the evolution of the Federal Reserve System and the American economy, but also the individual experiences that shaped each of these titans of global finance.
A Brief History of Central Banking in America
The Federal Reserve is only a recent addition to the list of institutions that govern our modern political economy, though its origins date back almost 800 years. By the late 13th century, international banking systems were already in use by Europe’s Knights Templar (among others) to transfer vast sums of wealth across Catholic borders, and China’s Kublai Khan was issuing fiat (paper) currency as early as 1273 to facilitate the collection of taxes and simplify transfers of gilded wealth. More traditional central banks started to emerge at the end of the 17th century – first in Sweden then in Britain, Holland, and other industrialized economies – as countries harmonized a myriad of domestic bank notes into single national currencies. This helped to simplify commercial transactions, centralize banking oversight, and perhaps most importantly, lower the cost of financing war.
In many respects, America was late to join the party. After two failed attempts to create a central bank under Alexander Hamilton in 1791 and Andrew Jackson in 1816, Woodrow Wilson finally signed the Federal Reserve Act into law in 1913, following a string of crises that ripped through the country’s financial system – including regional crop failures, real estate bubbles, and the Panic of 1907. At the time, most nations were still on the Gold Standard (i.e. their currency was pegged to the price of a specific quantity of gold) so the major role of the central bank was to monitor the national banking system to prevent liquidity crises, which the Federal Reserve did quite poorly in 1929. By raising interest rates instead of lowering them, the Fed amplified the already painful economic dislocation caused by the Great Depression.
After the Gold Standard was abandoned once and for all in 1971 (under the watchful eye of both Volcker at the United States Treasury and Greenspan in Nixon’s Council of Economic Advisors), central banks were permitted to print money at will in order to finance government expenditures, manipulate exchange rates, or alter the cost of borrowing in domestic currency terms. As the specter of inflation suddenly became a legitimate threat to economic stability – a reality which both men were forced to handle during their time at the Federal Reserve – the influence of central banks (in general) and the Chairman’s role (in particular) increased considerably. Under their leadership, the Fed assumed a much more powerful role in facilitating sustainable economic growth in America, establishing a credible institution to fight inflation in a world of exclusively fiat currencies, and preserving the overall health of the financial system.
In this capacity, Volcker was the first Chairman to deal effectively with the economic scourge of rampant inflation in this new floating-currency world, and his immediate successor Greenspan was the first to manage simultaneous crises in capital and currency markets without a prolonged recession. Each was hailed at the time as a savior of the American economy, increasing the public profile and political authority of the Federal Reserve System.
Much of what we’ve come to understand about these two titans of economics is rooted in public legend. Volcker’s reputation was solidified in the early 1980s as the “inflation slayer” and a true “giant of finance”, while Greenspan’s media handle drifted between “Maestro,” “oracle,” and “monetary messiah” over his 18 year tenure at the Fed. These legends are partially rooted in fact (Volcker was a giant at 6’7” after all), and partially the result of the arcane work they conducted as stewards of America’s economy. In order to fully understand their historic rise to power, however, it is important to first separate the men from the myth.
Paul Adolph Volcker Jr. was a lifelong Democrat, though he worked for administrations of both political persuasions during his time in Washington. He held strong convictions rooted in his austere upbringing, and was perceived almost universally to be prudent, fair, and trustworthy – traits he seems to have inherited from his father, a model of responsibility and public service. His most prominent role in American public life came as the unifying and unrelenting force behind the push to conquer “stagflation” in the late 1970s, which he achieved rather successfully after a program of painful belt-tightening by the Fed. A one-time basketball hopeful at Princeton and avid fly-fisherman, his humility was present in everything he did, from managing his meager finances, to caring for his chronically ill wife and son (the former suffered from diabetes and rheumatoid arthritis, while the latter was born with cerebral palsy), to campaigning tirelessly for the importance of public service.
Under his guidance, the Dow Jones Industrial Average climbed from a low of 933 in August 1979 to 2,680 when he left the office of Chairman in August 1987, and inflation fell from a peak of 13.3% in 1981 to roughly 4% by 1982 and 1% by 1986.[ii] Many suffered as a result of his austere management of the money supply, and while he made a lot of people rich he never aspired to great wealth himself. As Chairman, he was perfectly happy to live in a modest apartment on George Washington University’s campus in order to pay for his family’s swelling medical bills, and was renowned for taking public transit and wearing his shirts and suits until they were literally falling apart. Such was the myth of the man who slayed inflation, asking America to do no more than he himself had done: sacrificing short-term personal gain for the longer-term good of the nation.
The myth of “Greenspan the Maestro” evolved along a much different path, one that offered no less sacrifice for the public office he held but which seemed to offer considerably more reward. As a Republican and moral Objectivist, he was staunchly committed to the ideals of the free market and Adam Smith’s invisible hand, though he worked equally well with administrations of both parties and achieved most of his success during the prosperous Clinton years. The Greenspan Era at the Fed was marked by an increased volume of communication, as policy decrees and detailed minutes of FOMC meetings were promptly released to the public, along with frequent updates about the Fed’s policy “bias”. These messages evolved under his direction, reflecting his desire to influence broader psychological responses to interest rate decisions while keeping policy cards close to his chest.
To that end, Greenspan pioneered a new language which came to be known as “Fedspeak,” a byzantine mix of technical jargon and obfuscation which only inflated his image as an economics wizard and granted him license to conduct monetary policy in line his academic instincts. The danger, of course, was that his instincts were wrong. Other members of the FOMC sometimes suggested as much, but as Chairman, Greenspan had a unique institutional advantage: when he wanted to achieve a certain result during a meeting, he would simply vote first to establish a precedent. If he was already certain of the outcome, he would vote last to symbolize his support. Not surprisingly, few votes ever came out against the Chairman and many over his tenure were unanimous.
Under his watch, the Dow soared to 10,865 from the humble 2,680 where Volcker left it years before, one of the largest and most prolonged economic expansions in global history. But Greenspan’s rise to power, as with Volcker’s, is far more complex than the simple administration of monetary policy. Where the latter’s motivation was direct control of inflation, the former also sought to shape public perceptions about inflation. The difference may seem relatively minor, but over time the consequences have been catastrophic.
Origins and Rise to Power
One unifying theme both in Volcker’s early life and his later career has been integrity. Paul Jr. was born to the son of an austere “municipal manager” in the town of Teaneck, New Jersey in 1927. At the time, Teaneck was run like many small suburban townships, with a single appointed administrator responsible both for executing civic policy and managing the town’s finances. In this case, Teaneck’s finances were relatively limited, forcing Paul Sr. to squeeze every last dollar out of his meager town budget, including his own salary. He was strictly against doing favors or receiving any indirect benefit for the work he conducted as a public official. To preserve that integrity and teach his son an important life lesson, he had Paul Jr. fired from his first job at the local recreation center as soon as he saw his name on the municipal payroll, both to avoid any sign of nepotism but also because the other kids in the neighborhood needed the money more than he did. This puritan work ethic and selfless decision-making style guided Volcker throughout his life, and played a large role in his decision to run the Fed the way he did, and also why he ultimately chose to leave.
Despite being a top student at Teaneck High School, earning a spot on the National Honor Society, and playing on the varsity basketball team, his father thought the Ivy Leagues would be too much of a stretch for his son, given Paul Jr.’s lack of a decent preparatory school. Once enrolled at Princeton, however, he flourished in their economics program, preparing his senior thesis on the Federal Reserve. This ultimately translated into a junior research position at the Federal Reserve Bank of New York the following summer and his first chance to participate in the type of valuable public service which his father held so dear.
After attending Harvard to pursue graduate work in political economy, he transferred to the London School of Economics as a Rotary International Ambassadorial Fellow to finish his doctoral thesis. Volcker’s year in Europe was life-altering. In 1951 the city was just rebuilding after the end of World War II. Food was still being rationed and demolished buildings lined the streets.[iii] His education took place mostly outside the classroom and across the European mainland, while his emerging thesis virtually preordained him for a life in central banking – he chose to contrast the Federal Reserve and the Bank of England with respect to how they handled interest rates, foreign exchange, and financial regulation.
Upon his return he took a more senior position at the New York Fed, followed by a stint in private banking at Chase working directly for the chairman, David Rockefeller. Volcker was originally asked to assist a Congressional commission on money and credit in America, and later worked on the bank’s advisory commission to the Treasury Department. This was his first exposure to Washington politics, and he made an immediate impression as an honest and intelligent economist. That image ultimately prompted his former mentor at the New York Fed, Robert Rossa, to invite him to Washington to become Director of the Office of Financial Analysis in 1961, where he was quickly promoted to Undersecretary.
After a three-year stint back at Chase as Vice President of International Business, Nixon invited him to assume his mentor Rossa’s old post as Undersecretary for Monetary Affairs – the 3rd highest rank at the Treasury despite his being a Democrat. The shift took place just as the Bretton Woods system (i.e. the Gold Standard) was unwinding. Despite the fact that almost any economist at the time would have done anything to have that position, Volcker confessed that he “felt a tension between the excitement and satisfaction of serving the nation and financial responsibility toward his family.”[iv] Throughout his life he “never hungered for luxuries,” but grew increasingly worried about earning enough to support his ailing wife and their disabled son, funding their children’s education, and saving for a rainy day. Volcker had taken a large pay cut when he left Chase (from $110,000 to $55,000) and struggled to make ends meet. The image we get of Volcker during these years is “more like a graduate student than a prince of power and influence.”[v] However, this voluntary austerity and selfless care-giving simply “underscored his distain for materialism and added to his legendary reputation for integrity.” Beyond his economic and emotional hardships, Volcker always maintained a clarity of purpose and a desire to serve the public good, much like his father before him.
That integrity was eventually put to the test when news of Nixon’s improprieties began to surface. “I remember thinking when Watergate first broke, ‘What am I doing working for this guy. I ought to resign.’[vi]“ But his commitment to service was also important, and he was still mid-stream during negotiations around the post-Bretton Woods system. Once a new flexible exchange rate system was negotiated, he immediately resigned from Treasury and went back to run the New York Fed. As the banks’ new President, “his years of study, his sense of civic duty, and his calm detachment from the heat of politics would guide him in his decisions.”[vii]
Even in this lofty, well-established role he managed to shape his personal environment to reflect his humble values, and one anecdote typifies his outlook on public service. As he moved into the President’s office on the 10th floor of the Fed’s imposing downtown headquarters, he quickly realized that the antique mahogany desk from which five of his predecessors had governed would not accommodate his gigantic frame. One of the tallest Fed President in history, his legs simply wouldn’t fit under the table. Rather than order an expensive replacement (to which he would have been entitled) he simply asked one of the bank’s secretaries, Anne Poniatowski, to contract some carpenters to add blocks to the bottom of the existing desk. Not only did this preserve an important institutional tradition, but was an example of the “puritan ethic” that permeated both his personal and professional life.[viii]
Ultimately, President Carter invited Volcker back to Washington to take over the Fed Chairmanship from the ineffective William Miller, who was struggling to manage rampant inflation and stagnant growth. While Miller’s actions didn’t necessarily start the fire, his inactions certainly fanned the flames.
It was into this environment that Volcker the Giant first assumed the helm. In order to rescue the American economy, it would take the iron will of a man who knew the meaning of personal sacrifice, the instincts of an economist steeped in monetary theory, and the keen political insight of a Washington insider to manage one of the most difficult policy decisions of the late 20th century. Once in power, it didn’t take him long to foster the culture and rally the resources necessary to lead and succeed.
In contrast, Greenspan followed a much different path to the Fed, though in some ways their trajectories were quite similar. Both men were born just before the Great Depression, both were shaped by the idiosyncrasies of their fathers, both excelled at pursuits outside of mathematics, both developed a love for economics at an Ivy League school, both were guided by a strong moral compass, neither expected or even aspired to the chairmanship of the Fed, and both parachuted into the position during periods of intense economic turmoil. Beyond that, however, any similarities are superficial, and it is their differences which provide a greater insight into their divergent legacies.
If Volcker’s unifying theme was integrity, Greenspan’s was certainly confidence. Young Alan was born to Rose and Herbert Greenspan in 1926, a lower-middle-class Jewish couple living in New York City. His parents divorced early and his father played only a small direct role in his upbringing, though the lack of a male role model certainly shaped his early development. One of Greenspan’s few memories of his father came in the form of a personalized copy of his book about the Great Depression, Recovery Ahead!, which reads:
“May this my initial effort with a constant thought of you branch into an endless chain of similar effort so that at your maturity you may look back and endeavor to interpret the reasoning behind these logical forecasts and begin a like work of your own. Your dad.”[ix]
Right from the start he was a mathematical wizard, and by the age of five he could already add three-digit numbers in his head. An avid Brooklyn Dodgers fan, his numerical skills were well suited to one of his earliest passions: tracking baseball statistics. Despite an early commitment to moral rectitude – founding the Detective Scouts of Washington Heights with some friends to “ferret out evil”[x] – his early classmates viewed him as aloof and even snobbish. His high school yearbook inscription provided a sign of things to come: “Smart as a whip and talented. He’ll play the sax and clarinet too.” After an early affair with jazz brought him to Manhattan’s prestigious Juilliard School of Arts as a clarinet major, his interest quickly faded. In a matter of weeks, Greenspan had become incredibly self-aware about his relative strengths and weaknesses. “I was a pretty good amateur musician,” he confessed, “but I was average as a professional, and I was aware of that because you learn pretty quickly how good some professional musicians are. I realized it’s innate. You either have it or you don’t.”[xi]
With that, he returned to mathematics, enrolling at New York University’s School of Commerce. Under the tutelage of prominent professors, Greenspan received his B.A. in Economics (summa cum laude) in 1948 and his Masters in 1950. He then moved on to Columbia University where he studied under Arthur Burns (a staunch anti-Keynesian) for his PhD, which shaped his later views on the government’s role in managing the economy and established his thesis that the primary cause of inflation is excessive government spending (i.e. fiscal policy), not growth of the money supply (i.e. monetary policy). This insight alone would later impact global financial cycles for almost two decades, though at the time it seemed a mere matter of economic philosophy.
During his time at Columbia, Greenspan married and divorced a local artist, Joan Mitchell, whose biggest impact on his life was introducing him to “The Collective”, a group of artists and intellectuals who met regularly to discuss Objectivist philosophy under the guidance of its founder, Ayn Rand. Fiercely pro-capitalist and free-market oriented, the Objectivists were staunch individualists who debated about the merits of the gold standard, the inefficiencies of government regulation, and the ethics of rational self-interest. This played logically into Greenspan’s evolving thesis about society and economics. His frequent interactions with The Collective also honed his argumentation and ability to debate, skills that he would use often and to great effect later in his career. “Talking to Ayn Rand was like starting a game of chess thinking I was good, and suddenly finding myself in checkmate.”[xii]
After earning his PhD, he took a job at the Conference Board and poured through stacks of economic data as though they were Dodgers statistics. His first major project was an analysis of the impact of U.S. military spending from the Korean War on markets for aluminum, copper, and steel, along with skilled machinists and engineers.[xiii] Around the same time, a friend began to send him freelance writing contracts which allowed him the financial flexibility to risk a change of career. He quickly joined forces with the principal at the boutique investment bank Townsend-Skinner, inaugurating Townsend-Greenspan in early 1954.
At his new firm he consulted for Fortune 500 companies looking to forecast economic conditions in order to better inform their business strategy. Warning companies about the recession of 1958 was his first prediction for the economy as a whole, and he got it virtually perfect. Greenspan was a natural, and eventually bought-out the other half of the firm when his elder partner passed away later that same year. Already a millionaire at the age of 40, the success of his predictions enhanced his sense of self-confidence and mathematical prowess. Greenspan had become a true financial heavyweight, but it was nearly a decade later before he was first introduced to public service and Washington politics.
As the Vietnam War broke out, Greenspan was once again intrigued by the impact of government spending on the broader economy and his multinational clientele. In response, he started writing op-eds and journal articles that were critical of Johnson’s administration. By coincidence, in the late 1960s he bumped into an old jazz band mate from college who was working for Nixon’s Presidential campaign. Lenny Garment shared his thoughts about Johnson’s expensive fiscal platform and arranged a meeting with the Republican presidential nominee. Nixon was immediately impressed by Greenspan’s confidence, résumé and politics, and he brought him onboard as a volunteer, working on “economic and domestic policy.”
After the election Greenspan stayed on as budget liaison but refused all offers to join in any official capacity. It was only a matter of time before Nixon finally coaxed him away from Townsend-Greenspan with an offer to become chairman of the President’s Council of Economic Advisors in 1974, at a time when Volcker was just transitioning away from the Treasury Department in the wake of Watergate. Greenspan accepted just as Nixon resigned, but he agreed to stay on to help President Ford manage the difficult transition, and was perceived by all parties to be “untainted” by Nixon’s earlier improprieties.
He grew close to Ford as they tried to battle stagflation, and his role as advisor expanded as a result of the sound and confident advice he provided through the end of a difficult decade. He eventually returned to his private practice in 1977 when Carter took office, mused about starting a foreign policy consultancy with Henry Kissinger (an old high school classmate). It wasn’t until Volcker declined reappointment at the end of his second term that Reagan extended the offer to Greenspan – a fellow Republican – to head up the Fed. He said yes immediately.
The power of the Federal Reserve Chairman is mainly exercised during an FOMC vote. The committee meets regularly to discuss the current status of the economy, whether it requires a monetary intervention, and what that intervention ought to be. Here again these two Chairmen followed distinctly different paths. Volcker typically conducted his meetings by inviting each of the committee members to present their view of the economy before he offered his own, then all would vote on a course of action in line with traditional Fed protocol. In contrast, Greenspan turned the typical FOMC agenda on its head, first sharing his own views of the economy and the best way to proceed before soliciting the opinion of his peers. This order of operations was critical in setting the dynamic for FOMC votes. Under both scenarios the Chairman’s perspective carried considerable weight, and few votes ever turned out against his better judgment. However, under Volcker’s approach any appearance of disagreement with the Chairman was only present in the final vote, and not during their original analysis. Under Greenspan, the gauntlet was already thrown before anyone had a chance to speak, making open dissent far less likely.
In spite of these difference, both men consistently marshaled their best instincts and reframed key issues for the committee in a way that was practical, convincing, and politically palatable. They each proved to be masters at solving complex systems of political economy using fundamentally different approaches. Moreover, when exposed to these dynamic events, both men displayed a tremendous amount of what Joseph Nye calls “contextual intelligence”, shaping volatile environments like runaway inflation and a stock market collapse by coordinating limited resources, rapidly re-framing key issues, thoughtfully crafting responses, and effectively implementing their plans to achieve the most optimal result.
Volcker’s strategic insight came as a byproduct of the economic nightmare he was facing at the time and his understanding of decision-making biases within the FOMC. “When you have to make an explicit decision about interest rates all the time people don’t like it.”[xiv] He knew that he needed higher interest rates to slow down an overheated economy, but his colleagues on the FOMC were growing leery of continuously raising rates. In the face their lost resolve, his battlefield instinct was brilliant: he wouldn’t make his colleagues vote on setting the interest rate. Instead, he would ask them to vote on setting the money supply, a much less contentious request which would still achieve the same goal, since interest rates would simply adjust automatically.
Such a radical approach to monetary policymaking had never been tried before. Its success would take all the soft power Volcker could muster to win support among policymakers, his fellow FOMC members, and most importantly, the American public. Solidarity was critical as he built support for his plan. He needed a public display of support from the six other members of the board, along with the five presidents of the regional banks who collectively made up the FOMC. One former member recalls that Volcker never directly asked whether he would support the new plan. They simply sat down together, talked about monetary economics and the present situation, and by the end of the conversation both men knew what needed to be done.[xv]
A far bigger challenge would come from a Carter administration hesitant to try out any radical economic therapy in advance of an uphill re-election campaign. “My reading of the situation was that while the president would strongly prefer that we not move in the way we proposed, with all its uncertainties, he was not going to insist on that judgment in an unfamiliar field over the opinion of his newly appointed Federal Reserve chairman.”[xvi] Having worked at the Treasury, Volcker understood the structures of power that govern decision-making in Washington, and his instincts and resolve proved to be right on the mark.
As rates initially continued to climb, the public saw things differently and accusations that he was “destroying Middle America” and “the American Dream” quickly began to surface. He was implored by Congress and unemployed taxpayers to relent. Home builders sent 2x4s to his office with the message that they wouldn’t be needing them any time soon, auto dealers sent car keys, and farmers drove their idled tractors around the Federal Reserve building in Washington to protest.
But as Joseph Treaster suggests in his tome on Volcker’s rise to power, “Under pressure, Volcker was unmovable. He believed in his mission with the fervor of a priest, and he perceived that his critics among the president’s legions either did not understand basic economics or were pursuing political objectives that contradicted economics. This unyielding quality might not be ideal in many situations, but the Volcker style had certain advantages if you accepted the argument that the terrible inflation of the late 1970s was in part the result of the unwillingness of previous Fed chairmen to stay the course.”[xvii]
Over time, as he expected, inflation slowed down. High interest rates drew new capital into the country and inflated the value of the dollar, while lower expectations of future inflation caused Americans to start saving again. Volcker then started to lower rates, gently stimulating the economy toward more sustainable growth and relatively stable prices. His reputation had gone from zero to hero almost overnight, and despite a few bumps along the way, he would henceforth be known as the “slayer of inflation.”
With runaway prices effectively conquered and the economy back on track, Volcker’s patience with the political environment in Reagan’s administration – particularly the supply-side economics that came to dominate Republican decision-making – was beginning to take its toll. Despite being asked to return for a third term as Chairman, he felt that it was time for him to leave Washington to be with his ailing wife and return to private practice. Reagan was obviously sad to see such a gifted economist go, but was partially relieved since he could now offer Greenspan – a lifelong Republican and ardent free-marketer – the Fed’s most senior post. Greenspan’s credibility from serving on the President’s Council of Economic Advisors and his private work serving America’s largest companies made him the obvious choice as successor, and knowing the political scene in Washington made the transition that much easier.
Much like his predecessor, Greenspan’s Era at the Fed also got off to an auspicious start. He assumed the office of Chairman a mere two months before “Black Monday” on October 19, 1987. When he first arrived in Washington, the FOMC was still under the spell of Volcker’s gifted leadership, and the mood was still reasonably upbeat. Inflation had been “slayed,” the economy was experiencing modest growth, and nobody expected too much trouble on the horizon – nobody except Greenspan. Recent data suggested that inventories were shrinking, demand was starting to outpace supply, and goods were becoming more scarce. He’d seen it all before, first in 1958, again in 1973, and finally during the 1981-82 recovery from Volcker’s economic chemotherapy. A recession was on the horizon and he had to act fast. As Bob Woodward suggests in his landmark biography, “Greenspan could see that the other committee members didn’t share the alarm he felt and had somewhat concealed. He realized that he didn’t know enough yet. And he also didn’t think, having been there only a week, that he could walk into the room and expect loyalty and support from everyone….For Greenspan it was a sobering moment.”[xviii]
After preparing supporting data and holding an impromptu meeting with the only four Governors at the FOMC who were in Washington at the time, the group voted unanimously to increase rates by 0.5%, sending an unexpected warning to Wall Street that the Fed was once again worried about inflation – this time brought on by rampant speculation in equities and risky corporate debt. Retiring to his office, he watched the market’s real-time reaction to his decision. The Dow initially swooned before stabilizing at the end of the day, and his phone immediately rang at the end of the trading session. “Congratulations,” Paul Volcker said. “Now that you’ve raised the discount rate, you’re a central banker.”[xix] Though Greenspan’s tenure as Chairman would later be known for some of the lowest sustained rates in American history, at the outset he was more concerned about letting the inflation genie back out of the bottle. He had passed his first test at the helm, though auspiciously by altering FOMC voting protocol.
Weeks later, on October 19th, the Dow plunged 508 points or 22.6% in a single session – the largest one-day drop in history. This time it would take all of Greenspan’s ingenuity, resourcefulness, strategic planning, and keen analytics to prevent a Depression-like panic. Leading by example and delegating where the impact would be greatest, he acted swiftly to calm the markets, crafting a three-point plan to handle the impending crisis. First, he drafted a carefully worded message over night that would be released to the markets at 8:41am the next morning, reassuring the world that the Federal Reserve would do anything necessary to preserve the integrity of the American economy. The message earned high praise from Gerald Corrigan (then president of the New York Federal Reserve) who confessed, “Those are the best lines I’ve read since Shakespeare.”[xx] Next he met with Reagan and suggested that the President make an announcement that he would work with Congress to balance the government budget. While his own belief in smaller government was likely at work (inspired by his days with Ayn Rand and The Collective), at least part of the crisis in market confidence was the result of a soaring fiscal deficit. Finally, he asked Corrigan to call all of the biggest Wall Street banks and plead with them to carry on with business as usual (i.e. lending, investing, and taking on risk as though the market hadn’t imploded the day before).
Those first few days were nerve-racking for the banks, legislators, and fellow FOMC members, but Greenspan kept his calm. He knew that scared people often displayed less than perfect judgment, and it was his role to reassure the jittery markets that the Fed was there to help. After a few weeks, it was clear that a Depression-like crisis had been averted and Greenspan’s quick thinking and calculated response had been successful. It was also clear from the start of his tenure at the Fed that his gift for communication and coordination, along with expanded control over FOMC decision-making, would become critical tools in his application of power and extension of influence.
By 1994, he was communicating regularly with Congress and the American public, providing updates about the nature of the American economy and establishing himself as “America’s designated driver.” With a confident Greenspan at the helm, the world didn’t worry about economic growth: it simply assumed it. The Maestro would surely let us know if there was ever anything to worry about, not that anyone really understood what he was saying. Milton Friedman once commented that “he is a genius for being able to blur the issues. I listen to his testimony before Congress and I am rapt with admiration for his ability to take all that crap and turn back around and deliver sentences that sound like he’s saying something he’s really not.”[xxi]
Greenspan once explained: “Since I’ve become a central banker, I’ve learned to mumble with great coherence. If I seem unduly clear to you, you must have misunderstood what I said.”[xxii] Years later, when asked by the Joint Economic Committee of Congress whether eight increases in the Fed Funds Rate could possibly deflate the housing bubble, Greenspan would string together five or six arcane economic indicators into a narrative and essentially overwhelm the panel until they either agreed with him or gave up trying to challenge his position. While some have accused him of giving “transparency a bad name,”[xxiii] his most powerful tool as Fed Chairman was, in fact, information. Greenspan was the keeper of esoteric economic data that only he and his colleagues at the Fed could understand, like an oracle explaining entrails to the masses. As long as everyone trusted him to make the right decision, his authority to direct Fed policy was virtually limitless.
Greenspan coasted through various administrations with the same charming and obfuscatory prose, minimizing the length of the 1990-91 recession and providing the monetary stimulus (i.e. low interest rates) to fuel what later became the Internet, commodity bubbles of the late 1990s and early 2000s. As his tenure drew ever onward, through Republicans and Democrats, growth and mild recession, Y2K and September 11, the markets continued to turn to their “Maestro” and consumers to their “oracle” to sustain one of the longest economic expansions in history.
It was only in hindsight that blind trust in his supreme confidence, coupled with his uncanny ability to co-opt the opinions of those around him, ultimately sowed the seeds of the global economic crisis of 2007-09. The image of an omniscient Greenspan has since been undermined, replacing the wise and insightful Chairman who presided over nearly two decades of prosperity with a fallen prophet who grew too accustomed to always being right.
At the end of his eight year tenure in 1987, Volcker was no less passionate about public service, but was certainly ready to leave Washington politics behind. During Reagan’s re-election campaign he began to feel pressure from the White House – particularly from Treasury Secretary Jim Baker – on how to direct monetary policy to influence public opinion. Volcker considered reporting these activities to the Senate Banking Committee, but ultimately decided that stepping down was better for the country that tarnishing the White House.
He transitioned with pleasure into private life, returning to his alma mater part-time as a professor of economics while joining a boutique investment bank where philanthropy and personal integrity were core values. “We were there to give unbiased, unconflicted, sound advice,”[xxiv] something he excelled at all his life. It was a natural fit. Outside of paid work, he continued to campaign on behalf of corporate honesty (while lashing out against the Enrons, Arthur Andersons, and Adelphias of the world), strengthened the call to civil service with the publication of “Leadership For America”[xxv] and “The Quiet Crisis,”[xxvi] and took up the cause of finding aid for victims of the Holocaust.
More recently, he put his power and prestige to good use by supporting a collaborated global response to the current financial crisis, and was ultimately appointed as Obama’s recession czar which the media wholeheartedly endorsed. “Volcker whispering in Obama’s ear will make even Republicans comfortable, because he’s a hero of the right and a supporter of a strong dollar.”[xxvii] After a half century of public service, Volcker has never lost his reputation for integrity, intelligence, and the will to do whatever it takes to protect the public interest. Decades after his tenure at the Fed his legacy is still one of triumphant success.
Greenspan, on the other hand, has been greatly reviled of late. His bias toward liquidity at the end of his term put upward pressure on commodity prices and by extension on America’s swelling trade deficit. As the amount of public and private debt continued to soar and both inflation and stagnation resurfaced, Greenspan maintained his unflinching respect for the free markets and never once admitted any fault for over-stimulating the economy or poorly regulating banks and arcane derivatives markets.
When The Economist eulogized the outgoing Chairman in January of 2006, just weeks before he was expected to hand over the reins, the writing was already on the wall:
“The accolades bestowed upon Alan Greenspan ahead of his retirement on January 31st have a strong whiff of irrational exuberance….The Greenspan fan club claims that the chairman’s skilful policies have not only reduced economic volatility, but may also, at least temporarily, have increased America’s potential growth rate….[However] on Mr. Greenspan’s watch, America has also experienced the biggest stock market and housing bubbles in history. Presiding over one bubble could be seen as bad luck; presiding over two smacks of carelessness. The Greenspan era will not end on January 31st. Instead, his legacy will linger in the shape of the biggest economic imbalances in American history: a negative household saving rate and a record current-account deficit. Until these imbalances unwind – a process that could prove painful – it is too soon to applaud Mr. Greenspan’s record…” [xxviii]
Since his departure, the economy has only continued to deteriorate. Failures at Bear Stearns, Freddie and Fannie, AIG, Lehman, and Merrill Lynch have triggered the longest and deepest recession since Volcker’s battle with chronic inflation nearly three decades years before. Even still, this die-hard Objectivist, free-market loving, Milton Friedman-admiring academic has been slow to admit any flaw in his logic. When pressed by Congress in late 2008 to explain how the crisis might have happened, Greenspan denied any fault, though he did concede that “those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity – myself especially – are in a state of shocked disbelief….I still do not fully understand why it happened and obviously to the extent that I figure where it happened and why, I will change my views. If the facts change, I will change.” History may or may not forgive him his hubris, depending on how substantially the credit crisis affect the global economy, but it can never accuse him of thoughtless indecision.
In that respect, both Greenspan and Volcker are also very much alike. After all, both were calculated risk-takers with an incredible ability to reframe important issues in a way that helped them to build consensus in groups of any size, shape their environments to better reflect desired outcomes, and successfully achieve those outcomes through hard work and brute intellectual capacity. Given these traits, they were both considered virtually irreplaceable as they transitioned from one organization to the next – with one critical difference: Volcker’s integrity and commitment to the greater good produced a string of great decisions which have preserved his reputation as a legend of central banking. More than a quarter century later, his vision both of the relationship between government and the markets and of the principles guiding decision-making in the public interest have continued to stand the test of time. As for Greenspan, that supreme confidence which carried him through 18 prosperous years at the Fed has only damaged his reputation in the years since he left, and his absolute faith in free markets now seems as poorly placed as the markets blind faith in him.
(WORD COUNT: 7165)
[i] Caroline Baum, “Volcker Stands Tall, Greenspan Keeps Shrinking,” Bloomberg.com, April 9, 2008, http://www.bloomberg.com/apps/news?pid=20601039&sid=a1MJS6KbpTbk&refer=columnist_baum
[ii] Bureau of Labor Statistics, US Department of Labor, Monthly Labor Review, June 1999, p35
[iii] Joseph B. Treaster, Paul Volcker: The Making of a Legend (New Jersey: John Wiley & Sons, 2004). p106
[iv] Treaster, p40
[v] Treaster, p123
[vi] Treaster, p40
[vii] Treaster, p69
[viii] Treaster, p37
[ix] Alan Greenspan, Age of Turbulence: Adventure in a New World (New York: Penguin Press, 2007). p21
[x] Justin Martin, Greenspan: The Man Behind Money (New York: Perseus Publishing, 2000). p5
[xi] [you either have it or you don’t.]
[xii] Greenspan, p41
[xiii] Greenspan, p42
[xiv] [playing catch-up]
[xv] Treaster, p150
[xvi] Treaster, p157
[xvii] Treaster, p167-168
[xviii] Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000). p31
[xix] Woodward, p33
[xx] Steven Solomon, The Confidence Game: How Unelected Central Bankers are Governing the Changed Global Economy (New York: Simon & Schuster, 1995). p60
[xxi] Martin, p222
[xxii] Steven K. Beckner, Back from the Brink: The Greenspan Years (New York: Wiley, 1999). p12
[xxiii] E. Ray Canterbery, Alan Greenspan: The Oracle Behind the Curtain (Singapore: World Scientific, 2006). p40
[xxiv] Treaster, p190
[xxv] National Commission on the Public Service, “Leadership for America: Rebuilding the Public Service” (Washington: Lexington Books, 1989)
[xxvi] Paul A. Volcker, Public Service: The Quiet Crisis (Washington: American Enterprise Institute, 1988)
[xxvii] Monica Langley, “Volcker Makes a Comeback as Part of Obama Brain Trust,” Wall Street Journal, October 21, 2008
[xxviii] The Economist, Alan Greenspan, January 12, 2006